RIYADH/DAMMAM/JEDDAH, 18 April — There has been a mixed reaction in the Western expatriate community in the Kingdom to the introduction of income tax at 2.5 percent, as is presently being considered by the Shoura Council. Saudis will be exempted, because they already pay 2.5 percent zakah. Expatriates make up about 6 million of the Kingdom’s 23 million population.

The report sent a particularly big shock wave among the more than 1.7 million foreign workers who live in the Eastern Province (some 30,000 of them Americans), and many have told Arab News that they would like to urge the Cabinet as well as the Shoura Council to reconsider the proposal. No surprises there, of course: for who in the world actually likes to pay tax?

Initial reports of the proposed income tax were taken to be only rumors. Expatriates believed that, as in 1985, the order would be rescinded. However, an Arab News article brought home the fact that this time the proposal is for real.

Saudi businessmen and economic experts approached by Arab News were divided on the subject. Many felt that the tax should have been imposed a long time ago, while others believed that the authorities should draw up a more pragmatic plan in its efforts to boost the economy.

In Jeddah, Wilfred Paes, a senior bank executive from Australia, said the top earners among Western expatriates have come to the Kingdom mainly because of the attraction of tax-free salary. “Otherwise, the salary that they draw would be equal to what they can earn at home,” he pointed out.

Khurshid Ahmed, a Canadian executive working for an American company, said it could affect Canadians with non-resident status, since they still have to pay income tax in Canada — meaning that the latest move would subject them to double taxation. As it is, Canadians are a highly taxed society.

“Moreover, our vacation airfare, car and furnished housing are all taken into account for IT assessment,” Ahmed said.

M.R. Raghu, an economic analyst with a Riyadh-based consulting firm, said that from an economic point of view “the introduction of income tax would be a progressive step as there is a need for the government to increase its non-oil revenue.”

Currently, income tax constitutes only five percent of non-oil revenue for the Kingdom.

Jeremy Cho, business executive from Malaysia, said as Westerners generally work in the Kingdom because they get tax-free salaries, companies may be forced to offer more attractive packages to compensate for the 2.5 percent deduction.

At the corporate level, it is argued that the move could have an adverse impact on potential investors. Japanese concerns in this regard were articulated at the recent Saudi-Japan Business Council’s meeting in Riyadh, when the representatives of some Japanese companies were extremely eager to be told about the taxation structure, and warned that if an uneven structure is introduced it may put off foreign investment altogether.

However, in Jeddah, Huw W. Lewis, deputy general manager for marketing and development at Alhamrani United Co., said: “Income tax, if and when it comes, may help speed up the process of Saudization. After all, it may then become a less attractive place for them. From the Saudi point of view, it’s going to be a good thing — as employment is assured for them as and when expatriates start leaving in large numbers. My personal view on income tax is that countries need it and indeed other forms of taxation. Income tax should form the central pillar of fiscal policy for any developing economy such as Saudi Arabia.”

Saleh Al-Humaidan, former secretary-general of the Eastern Province Chamber of Commerce and Industry and managing director of Al-Youm Publishing Group, said that the flight of capital from the Kingdom was alarming, and so this is the main thing that needs to be addressed.

“It is important that we minimize it and evolve a system whereby a sizable income of the expatriate workers are spent here or invested here.”

There is a general suggestion that the government could put some limitations on the transfer of money by the expatriates. Countries like Nigeria have this kind of system according to which a foreign worker is required to spend a particular percentage of his income in that country.

There is no denying the fact that a 2.5 percent tax will not yield a handsome revenue as out of the 6 million foreign workers some 80 percent earn small wages.

However, it would be worthwhile if a national plan is evolved to contain the flight of capital. That would enhance investment in the country and give a boost to foreign exchange reserve.

— Javid Hassan, Saeed Haider & K.S. Ramkumar